[Federal Register Volume 61, Number 55 (Wednesday, March 20, 1996)]
[Rules and Regulations]
[Pages 11294-11303]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-6481]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 34
[Docket No. 96-06]
RIN 1557-AB48
Real Estate Lending and Appraisals
AGENCY: Office of the Comptroller of the Currency, Treasury.
ACTION: Final rule.
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SUMMARY: The Office of the Comptroller of the Currency (OCC) is
revising its rules governing real estate lending as part of its
Regulation Review Program. Consistent with the goals of the Program,
the final rule modernizes and clarifies the rules, reduces unnecessary
regulatory burdens, and applies regulatory requirements only where
needed to address safety and soundness concerns or accomplish other
statutory responsibilities of the OCC.
EFFECTIVE DATE: April 19, 1996.
FOR FURTHER INFORMATION CONTACT: Laura Goldman, Attorney, Bank
Activities and Structure (202) 874-5300; Thomas Watson, National Bank
Examiner, Credit & Management Policy (202) 874-5170; Frank R. Carbone,
National Bank Examiner, Credit & Management Policy (202) 874-5170;
Roland G. Ullrich, National Bank Examiner, Consumer and Fiduciary
Compliance (202) 874-4866; or Mark Tenhundfeld, Senior Attorney,
Legislative and Regulatory Activities (202) 874-5090, 250 E Street SW,
Washington, DC 20219.
SUPPLEMENTARY INFORMATION:
Background
The OCC has reviewed 12 CFR part 34 as another component of its
Regulation Review Program (Program). The goal of the Program is to
review all of the OCC's rules and to eliminate provisions that do not
contribute significantly to maintaining the safety and soundness of
national banks or to accomplishing the OCC's other statutory
responsibilities. Another goal of the Program is to clarify regulations
so that they more effectively convey the standards the OCC seeks to
apply. Consistent with these goals, the OCC intends for this final rule
to reduce regulatory costs and other burdens on national banks by
eliminating regulatory requirements that are neither essential to
maintaining the safety and soundness of national banks nor needed to
accomplish the OCC's statutory responsibilities.
The Proposal
On July 7, 1995, the OCC published a notice of proposed rulemaking
(NPRM or proposal) (60 FR 35353) to revise subparts A (General), B
(Adjustable-Rate Mortgages) (ARMs), and E (Other Real Estate Owned)
(OREO) of 12 CFR part 34.1 In the NPRM, the OCC proposed to
[[Page 11295]]
permit the suspension of the disposition period for leases that are
treated as OREO if a bank, acting in good faith, has entered into a
non-coterminous sublease (i.e., a sublease that has a term shorter than
the remainder of the master lease's term).2 Following termination
of a non-coterminous sublease, a bank would have the same amount of
time in which to dispose of the property that the bank had when it
entered into the sublease. The proposal also summarized the OCC's
general approach to questions of Federal preemption of State laws
governing real estate lending while emphasizing that this clarification
did not expand the scope of State law preemption beyond what appeared
in the former rule. Finally, the proposal removed redundant or
otherwise unnecessary provisions from the former rule and made several
other changes intended to improve the rule's clarity.
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\1\ As explained in the preamble to the NPRM, the OCC did not
propose to amend subparts C (Appraisals) or D (Real Estate Lending
Standards) because the OCC recently adopted these subparts on an
interagency basis and the OCC wishes to gather additional
information on their effectiveness before deciding whether to
recommend an interagency effort to revise them.
\2\ Under both the former rule and the NPRM, a coterminous
sublease is deemed to be an effective disposition of a lease that
has been transferred to OREO.
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The Final Rule and Comments Received
The OCC received 12 comments. Most commenters supported the
proposed changes. Comments were received from seven national banks, two
bank holding companies that control national banks, two trade groups,
and one law firm. Several commenters, while supporting the proposal,
suggested that the OCC make additional changes, as discussed later in
this preamble.
Three commenters raised issues concerning appraisals (subpart C of
part 34) while two offered suggestions concerning the real estate
lending standards (subpart D). The OCC will take these comments into
consideration when reviewing those subparts at a later date.
One commenter suggested that section 114 of the Riegle-Neal
Interstate Banking and Branching Efficiency Act (12 U.S.C. 43) (Riegle-
Neal Act) requires the OCC to resubmit for public comment proposed
Secs. 34.4, 34.5, 34.21, and 34.23, which contain statements of
preemption of various State laws. Section 114 requires, inter alia,
that the OCC publish notice of requests for the OCC to issue opinions
on whether Federal law preempts certain types of State laws, or when
the OCC, on its own initiative, proposes to issue such an opinion.
The OCC does not believe that section 114 applies to this
rulemaking. First, no prior notice under section 114 is required for
preemption issues that are essentially identical to those on which the
agency previously has opined. As was explained in the NPRM, each of the
sections at issue in the proposal is substantively identical to those
found in the existing rule.3 Second, the OCC has followed formal
rulemaking procedures in adopting and amending part 34, giving the
public ample opportunity to comment on each section. Third, the OCC is
adopting a rule, not issuing a preemption opinion or interpretation.
Thus, the section 114 procedures do not apply.
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\3\ See 60 FR at 35354, 35355, and 35356.
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The following discussion summarizes the amendments to part 34 and
the remaining comments.
Subpart A--General
Purpose and Scope (Sec. 34.1)
A national bank may make real estate loans pursuant to 12 U.S.C.
371 and 12 U.S.C. 24 (Seventh). Part 34 formerly identified (in
Sec. 34.3) loans that are not considered ``real estate loans'' for
purposes of 12 U.S.C. 371 but which national banks nevertheless may
make pursuant to 12 U.S.C. 24 (Seventh). The proposal removed the list
in Sec. 34.3, and eliminated cross-references in Sec. 34.1 to that
list. However, since former paragraphs (f) and (g) of Sec. 34.3
contained an exception to the regulation's scope, the proposal
incorporated the substance of those provisions into the proposed
``Scope'' section of the revised regulation. The proposal also
relocated the text authorizing national banks to engage in real estate-
related transactions from Sec. 34.1(a) to proposed Sec. 34.3. This
change was proposed to conform the order of subpart A of part 34 to
that of other OCC rules. Finally, the proposal set forth a statement of
the purpose of part 34.
The OCC received no comments on this section, which is adopted as
proposed with stylistic changes and one clarification. The final rule
adds a statement clarifying that part 34 applies to national banks and
their operating subsidiaries, except where otherwise noted (see, e.g.,
12 CFR 34.21(b)).
Definitions (Sec. 34.2)
The proposal placed definitions used in subpart A in one location.
The definition of ``due-on-sale clause'' was moved from former
Sec. 34.4 to proposed Sec. 34.2 without any change to the definition's
substance. The proposal added definitions of ``State'' and ``State law
limitations'' to avoid restating of the full scope of preemption in
every section that refers to preemption.
The OCC received no comments on this section, which is adopted as
proposed with minor stylistic edits.
General Rule (Sec. 34.3)
The proposal set forth the general rule authorizing national banks
to engage in real estate lending and related transactions, and
relocated this general rule to a new section to conform the order of
subpart A of part 34 to that followed in other OCC regulations.
The OCC received no comments on this section, which is adopted as
proposed with minor stylistic edits.
Loans Not Constituting Real Estate Loans (former Sec. 34.3--Removed)
Former Sec. 34.3 listed several types of loans that are not
considered real estate loans for purposes of part 34, but are
permissible for national banks under 12 U.S.C. 24 (Seventh). The former
provision was confusing and unnecessary. Therefore, the proposal
removed Sec. 34.3 in its entirety.
The OCC received no comments on this proposed removal, and
accordingly adopts the proposed change.
Applicability of Law (Sec. 34.4)
The proposal retained a statement of specific areas where Federal
law preempts State law in order to provide continued guidance in this
area. The proposal removed the vague reminder, found at former
Sec. 34.2(b), that national banks must comply with applicable laws, but
added, in Sec. 34.4(b), a general statement of the OCC's position with
respect to preemption in order to clarify that the list of areas where
State law is preempted, carried over from the former rule, is not
necessarily exhaustive. The proposed rule clarified that the OCC will
apply traditional principles of Federal preemption when determining
whether a State law affecting real estate lending is preempted. Under
these principles, State laws apply to national banks unless the State
law expressly or impliedly conflicts with Federal law, the State law
stands as an obstacle to the accomplishment of the full purposes and
objectives of the Federal law, or Federal law is so comprehensive as to
evidence a Congressional intent to occupy a given field.4
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\4\ The Supreme Court's most recent discussion of the principles
of Federal preemption may be found in Gade v. National Solid Wastes
Management Ass'n, 120 L. Ed. 2d 73 (1992), in which the Court
stated:
As both the majority and dissent acknowledge, we have identified
three circumstances in which a federal statute pre-empts state law:
First, Congress can adopt express language defining the existence
and scope of pre-emption. Second, state law is pre-empted where
Congress creates a scheme of federal regulation so pervasive as to
leave no room for supplementary state regulation. And third, ``state
law is pre-empted to the extent that it actually conflicts with
federal law.'' This third form of pre-emption, so-called actual
conflict pre-emption, occurs either ``where it is impossible for a
private party to comply with both state and federal requirements * *
* or where state law `stands as an obstacle to the accomplishment
and execution of the full purposes and objectives of Congress.' ''
120 L. Ed. 2d at 91 (Kennedy, J., concurring; citations
omitted). The plurality and dissenting opinions in Gade contain
essentially the same formulation. See id. at 84 and 95,
respectively.
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[[Page 11296]]
Other than the comment summarized earlier concerning the
application of section 114 of the Riegle-Neal Act (see text following
``The Final Rule and Comments Received,'' above), the OCC received no
comments on this provision, which is adopted as proposed with minor
stylistic edits.
Due-On-Sale Clauses (Sec. 34.5)
The proposal modified this section to improve clarity and to remove
unnecessary restatements of statutory provisions. No change was
proposed to the substance of those descriptions.
Other than the comment summarized above concerning the application
of section 114 of the Riegle-Neal Act (see text following ``The Final
Rule and Comments Received,'' above), the OCC received no comments on
this provision. The final rule makes minor stylistic edits to the
provision as proposed and removes the definition of the term
``lender,'' given that this term is not used in the final rule.
Subpart B--ARMs
Definitions (Sec. 34.20)
The proposal amended the definition of ``ARM loan'' by deleting the
provisions, found in former Sec. 34.5(a)(2), that exempt fixed-rate
extensions of credit that are payable either on demand or without any
interim amortization. The proposal made stylistic changes to the
definition of ``ARM loan,'' and removed the definition of ``consumer
credit'' because other changes to the rule make that definition
unnecessary. In order to consolidate all definitions used in subpart B,
the proposal relocated to Sec. 34.20 the definitions of ``affiliate''
and ``subsidiary'' formerly found in Sec. 34.6(b). Finally, the
proposal used the term ``renewal'' instead of ``refinance'' as that
term was used in former Sec. 34.5(a)(2) in order to avoid creating the
impression that the OCC rule applies to refinancings as that term is
narrowly defined in Regulation Z (Reg. Z, 12 CFR part 226) of the Board
of Governors of the Federal Reserve System (Federal Reserve).
In addition, the proposal sought comment on whether it remains
necessary or appropriate to continue to exempt from the definition of
``ARM loan'' fixed-rate loans that are payable at the end of a term
that, when added to all terms for which the bank has promised to
refinance the loan, is shorter than the term of the amortization
schedule. This exemption is similar, but not identical, to the
treatment of variable-rate transactions in Reg. Z. Specifically, the
OCC sought comment on (1) whether the difference between part 34 and
Reg. Z poses an unnecessary burden, and (2) whether commenters favor
amending part 34 to eliminate the difference, notwithstanding that such
approach would result in more loans being subject to the requirement
that a bank use an index beyond its control.
The OCC received three comments in response to the proposed changes
and the request for comments. Those commenters responding to the issues
raised by the exemption from the definition of ``ARM loan'' requested
that the OCC retain the exemption in the final rule. One commenter
noted that the highlighted difference between Reg. Z and part 34 does
not pose an unnecessary burden and that the bank already has systems in
place to deal with the difference. Another commenter noted that
removing the exemption would add a new layer of confusion to the
affected loans and would have the result of requiring banks to tie the
loans to an independent index. For the reasons advanced by the
commenters, and in light of the absence of any expression of problems
experienced by national banks, the OCC is retaining the exemption.
Another commenter suggested that the OCC should expand the
definition of ``ARM loan'' to be consistent with the definition of
``alternative mortgage transaction'' found in the Alternative Mortgage
Transaction Parity Act (Parity Act) (12 U.S.C. 3801 et seq.).5 The
suggested change would apply the general rule stated in Sec. 34.21
(which permits national banks to make, sell, purchase, participate in,
or otherwise deal in ARM loans without regard to State law limitations
on those activities) to a broader variety of loans, including home
equity loans. The commenter advocating this change suggested that the
former rule created a competitive disadvantage for national banks by
authorizing fewer types of ARM loans than may be made by other types of
lenders. No other commenter suggested that the definition of ``ARM
loan'' presents a problem.
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\5\ The Parity Act defines ``alternative mortgage transaction''
as:
[A] loan or credit sale secured by an interest in residential
real property, a dwelling, all stock allocated to a dwelling unit in
a residential cooperative housing corporation, or a residential
manufactured home * * * (A) in which the interest rate or finance
charge may be adjusted or renegotiated; (B) involving a fixed-rate,
but which implicitly permits rate adjustments by having the debt
mature at the end of an interval shorter than the term of the
amortization schedule; or (C) involving any similar type of rate,
method of determining return, term, repayment, or other variation
not common to traditional fixed-rate, fixed-term transactions,
including without limitation, transactions that involve the sharing
of equity or appreciation; described and defined by applicable
regulation.
12 U.S.C. 3802(1).
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The OCC has determined not to make the suggested change to the
definition of ``ARM loan.'' Historically, the OCC has confined the
scope of its ARM lending rule to home-purchase loans.6 While the
OCC's ARM lending rule does not authorize home equity lending, such
lending clearly is permissible under 12 U.S.C. 371, which permits any
national banking association to ``make, arrange, purchase or sell loans
or extensions of credit secured by liens on interests in real estate. *
* *'' Id. at 371(a). Thus, national banks may make the types of loans
that would be covered by the proposed expanded definition of ARM loan.
If a national bank encounters a provision of State law that it believes
is inappropriately restrictive, the bank may seek the OCC's opinion
concerning whether Federal law preempts the provision of State law in
question according to recognized principles of Federal preemption.
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\6\ See, e.g., 46 FR 18932, 18935 (March 27, 1981) (``The intent
of the regulation is to improve the availability of mortgage funds
for purchasing residential property and to provide protection to
home purchases. The intent is not to regulate adjustable rate loans
made for other purposes.'').
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The final rule adopts the changes to Sec. 34.20 as proposed in the
NPRM, except that it relocates the definitions of ``affiliate'' and
``subsidiary'' from Sec. 34.20 to Sec. 34.21(b). This change from the
proposal clarifies that only the provision concerning the purchase of
loans not in compliance with part 34 (Sec. 34.21(b)) applies to a
bank's affiliates and subsidiaries as these terms are defined in
section 23A of the Federal Reserve Act (12 U.S.C. 371c). Generally
speaking, part 34 applies to national banks and their operating
subsidiaries, unless the OCC determines otherwise.
General Rule (Sec. 34.21)
The proposal made only minor changes to simplify the general rule,
which provides that national banks and their subsidiaries may make,
sell, purchase, participate, or otherwise deal in ARM loans,
notwithstanding any State law to the contrary that applies to these
activities. The proposal intended no change in the former rule
governing preemption of State law limitations on ARM lending. A
national bank may
[[Page 11297]]
purchase or participate in ARM loans that were not made in accordance
with the OCC's regulations, except that, as already noted, loans
purchased from an affiliate or subsidiary must comply with part 34.
As noted earlier, the final rule relocates the definitions of
``affiliate'' and ``subsidiary'' to Sec. 34.21(b) to clarify that these
broadly encompassing definitions apply only in the limited
circumstances specified in that section. The final rule otherwise
adopts the proposal as published.
Index (Sec. 34.22)
Former Sec. 34.7 required ARM loans that are subject to 12 CFR
226.19(b) to specify an index to which changes in the interest rate
shall be linked. Under that section, the index is to be readily
available to, and verifiable by, the borrower and beyond the control of
the lending bank. Proposed Sec. 34.22 made no changes to the substance
of the former rule.
One commenter requested that the OCC drop the requirement of an
independent index altogether, and suggested that the secondary market
and competitive pressures will protect the consumer. The OCC has
decided to keep the independent index, because the agency believes that
the requirement provides a significant protection to the consumer and
that it creates only limited burden on national banks.
Another commenter expressed concern that the former and proposed
rules could be construed to prohibit rate changes based on such
criteria as termination of employment, discontinuance of payment by a
particular method, default, or termination of certain banking
relationships by the customer. The commenter suggested that the OCC
clarify that a national bank may decrease the interest rate at any time
and increase the rate pursuant to a formula or schedule set forth in
the relevant loan documents specifying the amount of the increase and
the times at which, or circumstances under which, the increase may be
made. The OCC agrees with the commenter that this clarification is
appropriate, and has made the suggested change along with minor
stylistic edits in the final rule.
Rate Changes (Former Sec. 34.8--Removed)
Former Sec. 34.8 set forth the limitation found in section 1204 of
the Competitive Equality Banking Act of 1987 (CEBA), Pub. L. 100-86,
100 Stat. 552 (12 U.S.C. 3806(a)), which requires a consumer credit ARM
loan to include a limitation on the maximum rate of interest that may
apply during the term of the loan. The proposal removed Sec. 34.8
because it is an unnecessary and potentially confusing restatement of
the statute. Moreover, CEBA vests rulemaking authority with the Federal
Reserve, which has implemented section 1204 of CEBA at 12 CFR 226.30.
The OCC received no comments on the proposed change, and the
section is removed as proposed.
Prepayment Fees (Sec. 34.23)
The proposal made no substantive change to this section (former
Sec. 34.9), which provides that national banks may impose fees for
prepayments of ARM loans, notwithstanding any State law to the
contrary.
The OCC received no comments on this section, which is adopted as
proposed with minor stylistic edits.
Disclosure (Former Sec. 34.10--Removed)
This section requires a national bank that offers consumer ARM
loans to provide the disclosures required by the Truth-in-Lending Act
(15 U.S.C. 1601, et seq.), as implemented by the Federal Reserve in
Reg. Z (12 CFR part 226). The OCC believes that the reminder to comply
with Reg. Z disclosures when making a consumer ARM loan was appropriate
when the OCC-imposed disclosure requirements were removed, but now is
unnecessary. Accordingly, the proposal removed this section in its
entirety. The proposal also removed the term ``consumer credit'' from
the definition section (former Sec. 34.5(b)) since it was used only in
former Sec. 34.10.
One person commented on this proposed change, requesting that the
final rule retain the reference to Reg. Z in order to remind national
banks that the Federal Reserve has promulgated rules governing
disclosure requirements related to ARM lending. The OCC remains of the
view that a general reminder that Reg. Z applies is unnecessary, and
that the presence of a reminder about the applicability of a separate
regulation in one portion of an OCC rule, but not in others, is
potentially confusing. Therefore, this section is removed from the
final rule.
Nonfederally Chartered Commercial Banks (Sec. 34.24)
Section 807(b) of the Garn-St Germain Act (Pub. L. 97-320, 96 Stat.
1545 (12 U.S.C. 3801 note)) requires the OCC to identify those
provisions of its ARM regulation that are inappropriate for
nonfederally chartered banks. In implementing section 807(b), the OCC
determined that all of the provisions of subpart B were appropriate,
and so stated in former Sec. 34.11. Proposed Sec. 34.25 retained this
statement in order to comply with the statute, and removed certain
unnecessary citations to statutory authority.
The OCC received no comments on this section, which is adopted as
proposed with stylistic edits.
Transition Rule (Sec. 34.25)
The former rule (Sec. 34.12) provided that national banks were
authorized to make or administer loans during a ``window period''
beginning on the date the former rule was adopted (March 11, 1988) and
ending October 1, 1988, if the loans complied with the OCC rules in
effect before the March 11, 1988 amendment. Following October 1, 1988,
all ARM loans have been required to comply with part 34, as revised.
The proposal retained most of the former rule but removed what are now
unnecessary references to the window period.
The OCC received no comments on this section, which is adopted as
proposed with stylistic edits.
Subpart C--Appraisals
The OCC did not propose any changes to the rules governing the use
of appraisals. Accordingly, subpart C is not amended.
Subpart D--Real Estate Lending Standards
The OCC did not propose any changes to the real estate lending
standards. Accordingly, subpart D is not amended.
Subpart E--OREO
Definitions (Sec. 34.81)
Former Sec. 34.81 contained the definitions used in subpart E. The
proposal made several changes to these definitions in addition to
stylistic edits. First, proposed Sec. 34.81 defined OREO to include
only ``debts previously contracted'' (DPC) real estate and former
banking premises, and removed the term ``covered transactions real
estate'' from the definition of OREO (thereby rendering the definition
of covered transactions real estate unnecessary). The proposal also
removed the term ``transaction value'' and corresponding definition.
The OCC received no comments on these proposed changes, which are
adopted as proposed with stylistic edits. However, one commenter
suggested that the OCC make an additional change that was not proposed
in the NPRM, namely, to exempt leases from the definition of OREO. This
commenter noted that the proposal, which required a bank to dispose of
OREO leases after the expiration of a non-coterminous sublease, would
require the bank to track properties for an extended period
[[Page 11298]]
of time in order to insure that the bank ultimately complied with the
disposition requirements. The commenter also raised a number of
questions prompted by the NPRM, such as whether the existence of a
sublease is sufficient despite the fact that a subtenant is delinquent
and whether the sublease must be at market rates.
The OCC believes that long-term leases of real property can present
many of the same risks that are presented by ownership of a fee simple
interest and, therefore, that safety and soundness reasons dictate that
leases be covered by the rules governing disposition of OREO. The
commenter is correct in concluding that a bank that has entered into a
non-coterminous sublease must dispose of the lease within the time
remaining under the OREO disposition rules once the sublease expires.
However, the OCC believes that the tracking burden associated with this
disposition requirement is minimal and reasonable in light of the
safety and soundness benefits derived by continuing to treat leases as
OREO. Questions regarding the adequacy of a particular sublease will be
addressed on a case-by-case basis. However, national banks are to
exercise good faith in entering into non-coterminous subleases.
Holding Period (Sec. 34.82)
The proposal clarified, in Sec. 34.82(b)(2), that the holding
period begins on the date that a national bank ceases to use former
banking premises without relocating the business formerly conducted
there to another site. The proposed rule also made changes to improve
clarity and to remove provisions that are redundant in light of 12
U.S.C. 29. The proposal relocated the requirement that a national bank
dispose of OREO when prudent judgment dictates from Sec. 34.83 (which
addresses the method of disposition) to Sec. 34.82 (which addresses
timing of disposition). Finally, proposed Sec. 34.82 retained a
statement regarding a bank's obligation to dispose of OREO. This
statement clarified that OREO, as defined in the regulation, is subject
to the divestiture provisions.
The OCC received no comments on this section, which is adopted as
proposed with minor stylistic edits.
Disposition of Real Estate (Sec. 34.83)
Formerly, Sec. 34.83(a)(5) permitted disposition of leases only
through assignment or a ``coterminous sublease'' (i.e., a lease with
the same duration as the remainder of the master lease). Many national
banks hold long-term leases and are unable either to assign them or to
find a coterminous sublessee, notwithstanding the bank's best efforts
to do so. As industry consolidation and technological advances further
reduce the utilization of branches and back- office space, this problem
likely will become more severe.
To address this problem, proposed Sec. 34.83(a)(3) permitted the
divestiture period to be suspended for the duration of a non-
coterminous sublease. The proposal also made numerous stylistic changes
to Sec. 34.83 that simplify the former regulation and eliminate
unnecessary repetition. The proposal modified Sec. 34.83(b) to clarify
that disposition efforts must be ongoing throughout the disposition
period. Finally, as previously noted, the proposal relocated the
provision in former Sec. 34.83 (requiring disposition when prudent
judgment dictates) to proposed Sec. 34.82.
The OCC received six comments on the proposed change affecting non-
coterminous subleases, and all six favored the change. In light of
these comments and for the reasons stated in the preamble to the NPRM,
the OCC adopts the proposed changes to this section, with the
additional changes noted as follows.
Two commenters requested that the OCC permit a national bank to
exercise options to extend a lease if the extension is necessary to
attract prospective sublessees. These commenters noted that a third
party will not enter into a sublease if the duration of the sublease is
insufficient to justify making whatever expenditures are required to
conform the property to the third party's business. The OCC agrees that
a national bank should have the flexibility to extend a lease if the
extension enables the bank to sublease the property and certain
safeguards are satisfied, and has modified Sec. 34.83(a)(3)
accordingly.
Historically, the OCC has required national banks to divest of OREO
as soon as possible. See, e.g., OCC Interpretive Letter No. 491 (1989-
1990 Transfer Binder) Fed. Banking L. Rep. (CCH) ] 83,074 at p. 71,184
(Sept. 6, 1989) (``It should be recognized that the Bank's paramount
obligation is to dispose of its interest in the lease [that has become
OREO] at the earliest possible date, consistent with 12 U.S.C. Sec. 29
* * *''). The OCC continues to require divestiture of OREO as soon as
possible but in any event within the divestiture period prescribed by
statute. The change proposed by the commenters is consistent with this
requirement. Under the changes proposed in the NPRM and by the
commenters, national banks remain obligated to take appropriate steps
before the disposition period expires either to dispose of a lease
outright (by assigning the lease or entering into a coterminous
sublease) or to enter into a non-coterminous sublease that will suspend
the running of the disposition period. The change proposed by the
commenters will facilitate a bank's compliance with this obligation.
While the OCC agrees that the change proposed by the commenters is
appropriate and consistent with applicable law, a national bank may not
enter into an extension of a master lease for the purpose of
speculating in real estate. For this reason, the final rule clarifies
that the OCC reserves the right to require a national bank to take
immediate steps to dispose of an extended lease if the OCC finds that
the bank entered into the extension for the purpose of real estate
speculation.7 The final rule also prohibits a national bank from
entering into an extension unless (1) the bank, prior to entering into
an extension of the master lease, has a firm commitment from a third
party to sublease the property and (2) the duration of the extension is
reasonable and does not materially exceed the duration of the sublease.
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7 The NPRM stated that the OCC reserves this right in
connection with leases in general but was silent on the question of
extensions of lease.
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The OCC also has amended Sec. 34.83(a)(3) to clarify that the
agency retains the authority to require a national bank to take
appropriate steps to dispose of a lease (or extension thereof) if the
OCC finds that the bank has not acted in good faith in entering into a
sublease. Thus, for instance, if a bank subleases property to a related
third party for a nominal amount so that the bank may retain possession
of the lease and speculate on the property's future value, the bank
will not have acted in good faith and the OCC will require the bank to
take immediate steps to dispose of the master lease.
Future Bank Expansion (Sec. 34.84)
Proposed Sec. 34.84 created a new section for the OCC's rule on
future bank expansion that formerly appeared in Sec. 34.83(c) in order
to make the future bank expansion rule easier to locate.
The OCC received no comments on this section, which is adopted as
proposed.
Appraisal Requirements (Sec. 34.85)
The proposal made no substantive change to the existing rule set
forth in former Sec. 34.84. This rule provides that a national bank
should obtain either an appraisal or evaluation, as appropriate
[[Page 11299]]
under 12 CFR part 34, subpart C, when real estate is transferred to
OREO or when OREO is sold. The former rule provided an exception to
this requirement if a national bank already has a valid appraisal or
evaluation for the property in question. Banks are to monitor the value
of each parcel of OREO in a manner consistent with prudent banking
practices.
One commenter suggested that the OCC not require appraisals every
time property formerly used (or intended to be used) as bank premises
is transferred to OREO. The OCC will consider this comment when the
agency reviews subpart C of part 34, which sets forth the rules
governing when and what type of an appraisal is required. The OCC
received no other comments on this section. The final rule makes
stylistic edits to the proposal and removes an unnecessary reminder in
Sec. 34.85(b) that a bank is to follow its real estate collateral
evaluation policy.
Additional Expenditures and Notification (Sec. 34.86)
The proposal rearranged Sec. 34.86 (former Sec. 34.85) to improve
clarity, and modified other parts of this section to simplify the
procedures for informing banks of the OCC's decision regarding proposed
additional expenditures. The OCC specifically sought comment on whether
the standard regarding completion of OREO development or improvement
projects provides sufficient guidance.
The OCC received one comment on this section. The commenter stated
that the existing guidance on the development of OREO is sufficient. In
light of this comment and the absence of comments requesting further
guidance, the OCC adopts this section as proposed with minor stylistic
edits.
Accounting Treatment (Sec. 34.87)
The proposal retained the former rule, which specified that OREO
reporting should conform to instructions in the Consolidated Report of
Condition and Income.
The OCC received one comment on the accounting treatment that
should be applied to OREO. The commenter suggested that, since the
leased property during the term of a non-coterminous sublease will not
be an asset to be disposed of, the OCC should require national banks to
account for the lease as ``premises'' and not ``held for sale.''
However, since a bank no longer uses OREO property as premises, the OCC
believes that OREO property that has been subleased by a bank is
appropriately accounted for as ``held for sale.'' The OCC received no
other comments on this section, which is adopted as proposed with minor
stylistic edits.
Application (Former Sec. 34.87)
Former Sec. 34.87 provided that subpart E is applicable to all OREO
held by a national bank, including OREO in existence since September
17, 1993. The proposal removed this provision since it is unnecessary
and potentially confusing.
The OCC received no comment on this proposed removal. Accordingly,
the OCC has removed former Sec. 34.87.
Effective Date
Section 302 of the Riegle Community Development and Regulatory
Improvement Act of 1994 delays the effective date of regulations
promulgated by the Federal banking agencies that impose additional
reporting, disclosure, or new requirements to the first day of the
first calendar quarter following publication of the final rule. The OCC
believes that section 302 is not applicable to this final rule, because
the effect of the regulation is to reduce burdens on national banks.
The final regulation does not impose any additional reporting or other
requirements not already contained in the current version of the OCC's
real estate lending regulations. The effective date of this final rule
is April 19, 1996.
Derivation Table
The following derivation table directs readers to the provision(s)
of the former regulation, if any, upon which the final provision is
based, and identifies generally the action taken.
Derivation Table
------------------------------------------------------------------------
Revised section Original section Comments
------------------------------------------------------------------------
34.1(a)......................... ................. Added.
34.1(b)......................... 34.1(b) Modified.
34.2(a)......................... 34.4(a) Modified.
34.2(b)......................... ................. Added.
34.2(c)......................... ................. Added.
34.3............................ 34.1(a) Modified.
34.4(a)......................... 34.2(a) Modified.
34.4(b)......................... ................. Added.
34.2(b) Removed.
34.3 Removed.
34.5............................ 34.4(a) Modified.
34.5............................ 34.4(b) Modified.
34.20........................... 34.5(a) Modified.
34.5(b) Removed.
34.21(a)........................ 34.6(a) Modified.
34.21(b)........................ 34.6(b) Modified.
34.22........................... 34.7 Modified.
34.8 Removed.
34.23........................... 34.9 Modified.
34.10 Removed.
34.24........................... 34.11 Modified.
34.25........................... 34.12 Modified.
34.81(a)........................ ................. Added.
34.81(b) Removed.
34.81(b)........................ 34.81(c) No change.
34.81(c)........................ 34.81(d) No change.
34.81(d)........................ 34.81(e) No change.
34.81(e)........................ 34.81(a) Modified.
[[Page 11300]]
34.81(f)........................ 34.81(f) No change.
34.81(g) Removed.
34.82(a)........................ 34.82(a) Modified.
34.82(b)........................ 34.82(b) Modified.
34.82(c)........................ 34.82(c) Modified.
34.82(a)........................ 34.83(a) Modified.
34.83(a)(1)(i).................. 34.83(a)(1) Modified.
34.83(a)(1)(ii)................. 34.83(a)(2) Modified.
34.83(a)(1)(iii)................ 34.83(a)(3) Modified.
34.83(a)(2)..................... 34.83(a)(4) Modified.
34.83(a)(3)..................... 34.83(a)(5) Modified.
34.83(a)(4)..................... 34.83(a)(6) Modified.
34.83(b)........................ 34.83(b) Modified.
34.84........................... 34.83(c) No change.
34.85(a)........................ 34.84(a) Modified.
34.85(b)........................ 34.84(b) Modified.
34.85(c)........................ 34.84(c) Modified.
34.86(a)(1)..................... 34.85(a)(2)(i) No change.
34.86(a)(2)..................... 34.85(a)(2)(ii) No change.
34.86(a)(3)..................... ................. Added.
34.86(b)........................ 34.85(b) Modified.
34.86(b)(1)..................... 34.85(a)(1) Modified.
34.87........................... 34.86 No change.
34.87 Removed.
------------------------------------------------------------------------
Regulatory Flexibility Act
It is hereby certified that this regulation will not have a
significant economic impact on a substantial number of small entities.
Accordingly, a regulatory flexibility analysis is not required. This
regulation will reduce the regulatory burden on national banks,
regardless of size, by simplifying and clarifying former regulatory
requirements.
Executive Order 12866
The OCC has determined that this final rule is not a significant
regulatory action under Executive Order 12866.
Unfunded Mandates Act of 1995
Section 202 of the Unfunded Mandates Act of 1995 (Unfunded Mandates
Act) requires that an agency prepare a budgetary impact statement
before promulgating an NPRM likely to result in a rule that includes a
Federal mandate that may result in the annual expenditure of $100
million or more in any one year by State, local, and tribal
governments, in the aggregate, or by the private sector. If a budgetary
impact statement is required, section 205 of the Unfunded Mandates Act
requires an agency to identify and consider a reasonable number of
alternatives before promulgating an NPRM. The OCC has determined that
the final rule will not result in expenditures by State, local, and
tribal governments, or by the private sector, of more than $100 million
in any one year. Accordingly, the OCC has not prepared a budgetary
impact statement or specifically addressed the regulatory alternatives
considered. As discussed in the preamble, the final rule will reduce
unnecessary burdens on national banks seeking to engage in real estate
lending.
List of Subjects in 12 CFR Part 34
Mortgages, National banks, Reporting and recordkeeping
requirements.
Authority and Issuance
For the reasons set out in the preamble, part 34 of chapter I of
title 12 of the Code of Federal Regulations is amended as set forth
below:
PART 34--REAL ESTATE LENDING AND APPRAISALS
1. The authority citation for part 34 is revised to read as
follows:
Authority: 12 U.S.C. 1 et seq., 29, 93a, 371, 1701j-3, 1828(o),
and 3331 et seq.
2. Part 34 is amended by revising subparts A, B, and E to read as
follows:
Subpart A--General
Sec.
34.1 Purpose and scope.
34.2 Definitions.
34.3 General rule.
34.4 Applicability of State law.
34.5 Due-on-sale clauses.
Subpart B--Adjustable-Rate Mortgages
34.20 Definitions.
34.21 General rule.
34.22 Index.
34.23 Prepayment fees.
34.24 Nonfederally chartered commercial banks.
34.25 Transition rule.
Subpart C--Appraisals
* * * * *
Subpart D--Real Estate Lending Standards
* * * * *
Subpart E--Other Real Estate Owned
34.81 Definitions.
34.82 Holding period.
34.83 Disposition of real estate.
34.84 Future bank expansion.
34.85 Appraisal requirements.
34.86 Additional expenditures and notification.
34.87 Accounting treatment.
Subpart A--General
Sec. 34.1 Purpose and scope.
(a) Purpose. The purpose of this part is to set forth standards for
real estate-related lending and associated activities by national
banks.
(b) Scope. This part applies to national banks and their operating
subsidiaries as provided in 12 CFR 5.34. For the purposes of 12 U.S.C.
371 and subparts A and B of this part, loans secured by liens on
interests in real estate include loans made upon the security of
condominiums, leaseholds, cooperatives, forest tracts, land sales
contracts, and construction project loans. Construction project loans
are not subject to subparts A and B of this part, however, if they have
a maturity not exceeding 60 months and are made to finance the
construction of either:
(1) A building where there is a valid and binding agreement entered
into by a financially responsible lender or other party to advance the
full amount of the
[[Page 11301]]
bank's loan upon completion of the building; or
(2) A residential or farm building.
Sec. 34.2 Definitions.
(a) Due-on-sale clause means any clause that gives the lender or
any assignee or transferee of the lender the power to declare the
entire debt payable if all or part of the legal or equitable title or
an equivalent contractual interest in the property securing the loan is
transferred to another person, whether by deed, contract, or otherwise.
(b) State means any State of the United States of America, the
District of Columbia, Puerto Rico, the Virgin Islands, the Northern
Mariana Islands, American Samoa, and Guam.
(c) State law limitations means any State statute, regulation, or
order of any State agency, or judicial decision interpreting State law.
Sec. 34.3 General rule.
A national bank may make, arrange, purchase, or sell loans or
extensions of credit, or interests therein, that are secured by liens
on, or interests in, real estate, subject to terms, conditions, and
limitations prescribed by the Comptroller of the Currency by regulation
or order.
Sec. 34.4 Applicability of State law.
(a) Specific preemption. A national bank may make real estate loans
under 12 U.S.C. 371 and Sec. 34.3 without regard to State law
limitations concerning:
(1) The amount of a loan in relation to the appraised value of the
real estate;
(2) The schedule for the repayment of principal and interest;
(3) The term to maturity of the loan;
(4) The aggregate amount of funds that may be loaned upon the
security of real estate; and
(5) The covenants and restrictions that must be contained in a
lease to qualify the leasehold as acceptable security for a real estate
loan.
(b) General standards. The OCC will apply recognized principles of
Federal preemption in considering whether State laws apply to other
aspects of real estate lending by national banks.
Sec. 34.5 Due-on-sale clauses.
A national bank may make or acquire a loan or interest therein,
secured by a lien on real property, that includes a due-on-sale clause.
Except as set forth in 12 U.S.C. 1701j-3(d) (which contains a list of
transactions in which due-on-sale clauses may not be enforced), due-on-
sale clauses in loans, whenever originated, will be valid and
enforceable, notwithstanding any State law limitations to the contrary.
For the purposes of this section, the term real property includes
residential dwellings such as condominium units, cooperative housing
units, and residential manufactured homes.
Subpart B--Adjustable-Rate Mortgages
Sec. 34.20 Definitions.
Adjustable-rate mortgage (ARM) loan means an extension of credit
made to finance or refinance the purchase of, and secured by a lien on,
a one-to-four family dwelling, including a condominium unit,
cooperative housing unit, or residential manufactured home, where the
lender, pursuant to an agreement with the borrower, may adjust the rate
of interest from time to time. An ARM loan does not include fixed-rate
extensions of credit that are payable at the end of a term that, when
added to any terms for which the bank has promised to renew the loan,
is shorter than the term of the amortization schedule.
Sec. 34.21 General rule.
(a) Authorization. A national bank and its subsidiaries may make,
sell, purchase, participate in, or otherwise deal in ARM loans and
interests therein without regard to any State law limitations on those
activities.
(b) Purchase of loans not in compliance. A national bank may
purchase or participate in ARM loans that were not made in accordance
with this part, except that loans purchased, in whole or in part, from
an affiliate or subsidiary must comply with this part. For purposes of
this paragraph, the terms affiliate and subsidiary have the same
meaning as in 12 U.S.C. 371c.
Sec. 34.22 Index.
If a national bank makes an ARM loan to which 12 CFR 226.19(b)
applies (i.e., the annual percentage rate of a loan may increase after
consummation, the term exceeds one year, and the consumer's principal
dwelling secures the indebtedness), the loan documents must specify an
index to which changes in the interest rate will be linked. This index
must be readily available to, and verifiable by, the borrower and
beyond the control of the bank. A national bank may use as an index any
measure of rates of interest that meets these requirements. The index
may be either single values of the chosen measure or a moving average
of the chosen measure calculated over a specified period. A national
bank also may increase the interest rate in accordance with applicable
loan documents specifying the amount of the increase and the times at
which, or circumstances under which, it may be made. A national bank
may decrease the interest rate at any time.
Sec. 34.23 Prepayment fees.
A national bank offering or purchasing ARM loans may impose fees
for prepayments notwithstanding any State law limitations to the
contrary. For purposes of this section, prepayments do not include:
(a) Payments that exceed the required payment amount to avoid or
reduce negative amortization; or
(b) Principal payments, in excess of those necessary to retire the
outstanding debt over the remaining loan term at the then-current
interest rate, that are made in accordance with rules governing the
determination of monthly payments contained in the loan documents.
Sec. 34.24 Nonfederally chartered commercial banks.
Pursuant to 12 U.S.C. 3803(a), a State chartered commercial bank
may make ARM loans in accordance with the provisions of this subpart.
For purposes of this section, the term ``State'' shall have the same
meaning as set forth in Sec. 34.2(b).
Sec. 34.25 Transition rule.
If, on October 1, 1988, a national bank had made a loan or binding
commitment to lend under an ARM loan program that complied with the
requirements of 12 CFR part 29 in effect prior to October 1, 1988 (see
12 CFR Parts 1 to 199, revised as of January 1, 1988) but would have
violated any of the provisions of this subpart, the national bank may
continue to administer the loan or binding commitment to lend in
accordance with that loan program. All ARM loans or binding commitments
to make ARM loans that a national bank entered into after October 1,
1988, must comply with all provisions of this subpart.
Subpart C--Appraisals
* * * * *
Subpart D--Real Estate Lending Standards
* * * * *
Subpart E--Other Real Estate Owned
Sec. 34.81 Definitions.
(a) Capital and surplus means:
(1) A bank's Tier 1 and Tier 2 capital as calculated under the
OCC's risk-based capital standards set out in appendix A to part 3 of
this chapter based upon the bank's Consolidated
[[Page 11302]]
Report of Condition and Income filed under 12 U.S.C. 161; plus
(2) The balance of a bank's allowance for loan and lease losses not
included in the bank's Tier 2 capital, for purposes of the calculation
of risk-based capital under Appendix A to 12 CFR part 3, based upon the
bank's Consolidated Report of Condition and Income filed under 12
U.S.C. 161.
(b) Debts previously contracted (DPC) real estate means real estate
(including capitalized and operating leases) acquired by a national
bank through any means in full or partial satisfaction of a debt
previously contracted.
(c) Former banking premises means real estate (including
capitalized and operating leases) for which banking use no longer is
contemplated. This includes real estate originally acquired for future
expansion that no longer will be used for expansion or other banking
purposes.
(d) Market value means the value determined in accordance with
subpart C of this part.
(e) Other real estate owned (OREO) means:
(1) DPC real estate; and
(2) Former banking premises.
(f) Recorded investment amount means:
(1) For loans, the recorded loan balance, as determined by
generally accepted accounting principles; and
(2) For former banking premises, the net book value.
Sec. 34.82 Holding period.
(a) Holding period for OREO. A national bank shall dispose of OREO
at the earliest time that prudent judgment dictates, but not later than
the end of the holding period (or an extension thereof) permitted by 12
U.S.C. 29.
(b) Commencement of holding period. The holding period begins on
the date that:
(1) Ownership of the property is originally transferred to a
national bank;
(2) A bank completes relocation from former banking premises to new
banking premises or ceases to use the former banking premises without
relocating; or
(3) A bank decides not to use real estate acquired for future bank
expansion.
(c) Effect of statutory redemption period. For DPC real estate that
is subject to a redemption period imposed under State law, the holding
period begins at the expiration of that redemption period.
Sec. 34.83 Disposition of real estate.
(a) Disposition. A national bank may comply with its obligation to
dispose of real estate under 12 U.S.C. 29 in the following ways:
(1) With respect to OREO in general:
(i) By entering into a transaction that is a sale under generally
accepted accounting principles;
(ii) By entering into a transaction that involves a loan guaranteed
or insured by the United States government or by an agency of the
United States government or a loan eligible for purchase by a
Federally-sponsored instrumentality that purchases loans; or
(iii) By selling the property pursuant to a land contract or a
contract for deed;
(2) With respect to DPC real estate, by retaining the property for
its own use as bank premises or by transferring it to a subsidiary or
affiliate for use in the business of the subsidiary or affiliate;
(3) With respect to a capitalized or operating lease:
(i) By obtaining an assignment or a coterminous sublease. If a
national bank enters into a sublease that is not coterminous, the
period during which the master lease must be divested will be suspended
for the duration of the sublease, and will begin running again upon
termination of the sublease. A national bank holding a lease as OREO
may enter into an extension of the lease that would exceed the holding
period referred to in Sec. 34.82 if the extension meets the following
criteria:
(A) The extension is necessary in order to sublease the master
lease;
(B) The national bank, prior to entering into the extension, has a
firm commitment from a prospective subtenant to sublease the property;
and
(C) The term of the extension is reasonable and does not materially
exceed the term of the sublease;
(ii) Should the OCC determine that a bank has entered into a lease,
extension of a lease, or a sublease for the purpose of real estate
speculation in violation of 12 U.S.C. 29 and this part, the OCC will
take appropriate measures to address the violation, which may include
requiring the bank to take immediate steps to divest the lease or
sublease; and
(4) With respect to a transaction that does not qualify as a
disposition under paragraphs (a)(1) through (3) of this section, by
receiving or accumulating from the purchaser an amount in a down
payment, principal and interest payments, and private mortgage
insurance totalling at least 10 percent of the sales price, as measured
in accordance with generally accepted accounting principles.
(b) Disposition efforts and documentation. A national bank shall
make diligent and ongoing efforts to dispose of each parcel of OREO,
and shall maintain documentation adequate to reflect those efforts.
Sec. 34.84 Future bank expansion.
A national bank normally should use real estate acquired for future
bank expansion within five years. After holding such real estate for
one year, the bank shall state, by resolution of the board of directors
or an appropriately authorized bank official or subcommittee of the
board, definite plans for its use. The resolution or other official
action must be available for inspection by national bank examiners.
Sec. 34.85 Appraisal requirements.
(a) General. (1) Upon transfer to OREO, a national bank shall
substantiate the parcel's market value by obtaining either:
(i) An appraisal in accordance with subpart C of this part; or
(ii) An appropriate evaluation when the recorded investment amount
is equal to or less than the threshold amount in subpart C of this
part.
(2) A national bank shall develop a prudent real estate collateral
evaluation policy that allows the bank to monitor the value of each
parcel of OREO in a manner consistent with prudent banking practice.
(b) Exception. If a national bank has a valid appraisal or an
appropriate evaluation obtained in connection with a real estate loan
and in accordance with subpart C of this part, then the bank need not
obtain another appraisal or evaluation when it acquires ownership of
the property.
(c) Sales of OREO. A national bank need not obtain a new appraisal
or evaluation when selling OREO if the sale is consummated based on a
valid appraisal or an appropriate evaluation.
Sec. 34.86 Additional expenditures and notification.
(a) Additional expenditures on OREO. For OREO that is a development
or improvement project, a national bank may make advances to complete
the project if the advances:
(1) Are reasonably calculated to reduce any shortfall between the
parcel's market value and the bank's recorded investment amount;
(2) Are not made for the purpose of speculation in real estate; and
(3) Are consistent with safe and sound banking practices.
(b) Notification procedures. (1) A national bank shall notify the
appropriate supervisory office at least 30 days before implementing a
development or improvement plan for OREO when the sum of the plan's
estimated cost and the bank's current
[[Page 11303]]
recorded investment amount (including any unpaid prior liens on the
property) exceeds 10 percent of the bank's capital and surplus. A
national bank need notify the OCC under this paragraph (b)(1) only
once. A national bank need not notify the OCC that the bank intends to
re-fit an existing building for new tenants or to make normal repairs
and incur maintenance costs to protect the value of the collateral.
(2) The required notification must demonstrate that the additional
expenditure is consistent with the conditions and limitations in
paragraph (a) of this section.
(3) Unless informed otherwise, the bank may implement the proposed
plan on the thirty-first day (or sooner, if notified by the OCC)
following receipt by the OCC of the bank's notification, subject to any
conditions imposed by the OCC.
Sec. 34.87 Accounting treatment.
A national bank shall account for OREO, and sales of OREO, in
accordance with the Instructions for the preparation of the
Consolidated Reports of Condition and Income.
Dated: March 7, 1996.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 96-6481 Filed 3-19-96; 8:45 am]
BILLING CODE 4810-33-P